[Exclusive] Court Orders Bank to Return Remaining Investment After Voluntary Adjustment for Fund Sale [Invest&Law]

Hana Bank's Sale of Italian Healthcare Private Equity Fund
Explained as "Mandatory Early Redemption in One Year"... Appeals Court Rules "Investors Were Misled"
Ordered to Return Remaining Investment Even After Voluntary Settlement

A second-instance court has ruled that a bank which sold an Italian healthcare private equity fund (PEF) to investors after describing it as a "product that will be compulsorily redeemed early after one year" must return the remaining principal and interest to the investor after voluntary settlement.

According to legal circles on August 5, the Seoul Central District Court's Civil Division 11-2 (Presiding Judge Kwak Hyungseop) partially overturned the first-instance ruling in the appeal filed by investor A against Hana Bank and ruled, "Hana Bank must pay A 101.4 million won and interest."

The appellate court found that the employee responsible for investment products at headquarters was aware that the explanation about early redemption was not factual, and that the private banker (PB) either knew or could have known this as well. The bench determined that Hana Bank "was aware from the outset that the fund contract could be canceled," thus qualifying as a "malicious beneficiary." This overturned the first-instance ruling, which had considered the bank to be a "good faith beneficiary."

Under civil law, good faith and bad faith refer to whether the recipient knew that there was no legal basis for retaining the received benefit. A good faith beneficiary only needs to return the benefit to the extent that it currently remains, whereas a malicious beneficiary must return the received amount with interest, regardless of whether the benefit remains. If a loss has occurred, compensation for damages is also required.

"Compulsory Redemption" Explained Contrary to Official Documents

Previously, in July 2019, A invested 507 million won in the Italian healthcare fund at the recommendation of a Hana Bank PB. The official product proposal specified an investment period of about 37 months. It noted that early termination could be made at the counterparty's discretion at 13 or 25 months after inception, but also stated that redemption would depend on market conditions and included the possibility of principal loss.

However, the employee responsible for investment products at Hana Bank headquarters sent an email to PBs stating: "Early redemption is possible at around 1 year and 1 month," and, "There are no separate conditions for early redemption (compulsory redemption)." The PB, after receiving the email, also explained to A that the fund was a "one-year product."

Even in a post-subscription phone call, the PB said in effect, "Hana Bank was selling it as a guaranteed one-year early redemption product," and, "I guided the client based on instructions from the headquarters product team."

First-Instance "Good Faith" Determination Overturned on Appeal

The first-instance court recognized the PB's explanation—contrary to the official materials—that the product would be unconditionally redeemed after one year as an act of "fraud (deception)" and allowed the fund contract to be canceled.

However, the court ruled that it was difficult to conclude that Hana Bank was aware of the possibility of contract cancellation or that the received funds constituted unjust enrichment at the time the investment was received, and thus regarded the bank as a good faith beneficiary. It also dismissed the return claim, stating that there was "no remaining benefit" as the investment money had been incorporated into the fund's trust property and no longer remained with Hana Bank.

In contrast, the appellate court held that whether or not early redemption was possible was key information that determined contract formation. The appellate panel pointed out, "There is a significant difference between a three-year maturity and a one-year early redemption when it comes to an investor's capital planning and risk assessment."

Early redemption after 13 months was, in effect, difficult to achieve using only proceeds from recovering the underlying assets, and using newly raised capital from subsequent fund sales as a funding source had been considered. There was also no written agreement obligating the securities company to exercise its call option.

The court noted that the headquarters employee was responsible for launching and providing guidance on fund sales. The bench stated, "It is reasonable to consider that, regarding this fund, the defendant's representative, and thus the defendant itself, can be identified together." The court further stated, "(The explanations by the headquarters employee and PB) constituted a false notice regarding a material matter in the transaction, delivered in a manner egregiously contrary to the duty of good faith and fair dealing," and regarded Hana Bank as a malicious beneficiary.

Since A had already received 405.6 million won through voluntary settlement in 2023—representing 80% of the investment—the appellate court ordered Hana Bank to pay the remaining 20%, namely 101.4 million won, plus interest calculated from the investment date of July 4, 2019.

A Separate Group Lawsuit Was Dismissed... Individual Evidence Determined the Outcome

This ruling differs from the outcome in a group lawsuit filed by other investors in the same fund, which was dismissed. In the group lawsuit, investor mistake and contract cancellation were recognized, but Hana Bank was determined to be a good faith beneficiary because there was no evidence to show that the grounds for cancellation had been recognized. The claims were all dismissed, as the investment was incorporated into the fund's trust property and there was no remaining benefit.

In A's case, however, key evidence included headquarters emails, PB explanations, and post-investment recorded calls. Jung Hyeonjong, the attorney representing A, stated, "There have been many rulings relating to investor mistake in the past, but it appears there have not been many cases where fraud or malice by the seller was recognized," adding, "Even for the same type of fund, the outcome can differ depending on the specific evidence and arguments presented in each case."

Meanwhile, Hana Bank has appealed the appellate court's decision to the Supreme Court.

This content was produced with the assistance of AI translation services.